Firms That Fought Dodd-Frank May Profit Under Republican House

Republicans will try to rein in regulators implementing a sweeping overhaul of financial rules and press for a smaller federal role in the mortgage market as they return to a majority in the House of Representatives and a stronger minority in the Senate.

Taking control of the House and bolstering their position in the Senate will increase Republicans’ sway over the direction and independence of the Consumer Financial Protection Bureau and over any technical fixes Congress makes in rules governing the trading of derivatives. Networks projected that Republicans won the seats needed to claim a majority of the House.

Republicans say they will use the House Financial Services Committee to ensure that regulators such as the Commodity Futures Trading Commission and the new consumer protection bureau do not write rules that lawmakers consider too restrictive to the banking industry.

“We don’t want them to regulate capriciously, arbitrarily, without engaging in a cost-benefit analysis,” Representative Jeb Hensarling, a Texas Republican on the panel, said in an interview before the election.

A slowdown in rule making or added pressure on regulators may benefit companies such as Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp., which lobbied against portions of the Dodd-Frank law and predicted the measure would hurt their financial results.

President Barack Obama called attention to the Republican agenda in his weekly radio and Internet address Oct. 23, saying House and Senate members “are now beating the drum to repeal all of these reforms and consumer protections.”

“I think it would be a terrible mistake,” Obama said.

Fundamental Reshaping

Because Democrats still control the White House and the Senate, Republicans will be unlikely to make good on their calls for a fundamental reshaping or outright repeal of the Dodd-Frank law or unwinding the government’s role in housing finance.

Still, the Republican approach will mark a shift from the era of Democratic control when bankers often were the ones being called to account before the Financial Services Committee.

The Dodd-Frank act, which requires federal agencies to write more than 240 rules, provide 67 one-time reports and conduct 22 recurring studies, according to an analysis by Davis Polk & Wardwell LLP, will give Republicans a chance to put the spotlight on regulators, said members, analysts and lobbyists.

“The targets will be bloat and corruption within the regulatory agencies.” said Sam Geduldig, a Washington-based financial services lobbyist for Clark, Lytle & Geduldig and former Republican leadership aide.

New Leaders

Representative Spencer Bachus, an Alabama Republican, is in line to take the chairmanship of the House Financial Services Committee from Massachusetts Democrat Barney Frank, according to lawmakers and legislative aides. In the Senate, South Dakota Democrat Tim Johnson is in line to replace Banking Committee Chairman Christopher Dodd, the retiring Connecticut Democrat.

The Republican majority in the House may give Senate Democrats incentive to reach across party lines on financial issues, because proposed changes will require backing from both parties to become law. Bipartisan compromise, which was non- existent in committee votes during the Dodd-Frank debate, will need to be a focus next year, Johnson said in a telephone interview.

“We sometimes differ on how we achieve our goals, but we have to agree more often than not,” said Johnson, who represents a state that has backed Republicans in every presidential election since 1968.

Bachus, through a spokeswoman, declined to comment.

Housing Finance

Financial-industry executives who aligned with Republican lawmakers in opposition to provisions of the Dodd-Frank law may find themselves at odds with the new House leadership over federal guarantees for real-estate loans.

“We need to come up with something where we no longer have an implicit or explicit guarantee on any such entities,” Representative Scott Garrett of New Jersey, a senior Republican on the House panel, said in a telephone interview.

Republicans including Bachus and Hensarling favor a free- market approach that would phase out U.S. support for Fannie Mae and Freddie Mac, the government-sponsored mortgage giants that have operated under federal conservatorship since they were seized amid soaring losses in September 2008.

The government bailout of the two companies, which own or insure half of the U.S. mortgage market, could be costliest part of the federal response to the financial crisis. Taxpayers could spend as much as $259 billion on the two firms through 2013, the Federal Housing Finance Agency said last month.

Mortgage Guarantees

Companies involved in real-estate sales and financing want the U.S. to continue guaranteeing mortgages to protect investors as the housing market recovers from the worst economic collapse since the Great Depression.

Treasury Secretary Timothy F. Geithner has said he will present the Obama administration’s plan for restructuring housing finance by the end of January

There is no consensus among Republicans about whether to restructure Fannie Mae and Freddie Mac or to abolish the government-sponsored enterprise model, said Bert Ely, a banking industry consultant. The lack of a united front, combined with concern over continued weakness in the housing market, is likely to forestall legislation on the issue in the next Congress, said Ely, who is based in Arlington, Virginia.

“I think Congress will be too scared of the unintended consequences of dealing with Fannie and Freddie while this mess is going on,” he said.

Republican gains in the Senate may help shape the direction of the new consumer bureau, which will have power to write and enforce rules for banks, mortgage brokers, retailers, credit- card companies, debt collectors and credit-scoring firms.

Elizabeth Warren

The Obama administration, which is facing a July deadline to organize the bureau and name a director, may find it more difficult to get the 60 Senate votes needed to win confirmation for its nominee. Elizabeth Warren, the Harvard University law professor championed by consumer and labor groups, was named as a special adviser to help shape the agency after Republicans said they would oppose having her lead it.

Republicans want to limit the bureau’s independence, in part by bringing its funding under the control of congressional appropriators, lawmakers said. Currently, the bureau would get its funding directly from the Federal Reserve.

In narrowing the Democrats’ majority, Senate Republicans may have gained leverage that will enable them to trade change in the bureau’s structure for approval of a director, Ely said.

Heavily Invested

Financial companies are heavily invested in the outcome.

Bank of America Corp. on Oct. 19 reported a $9.87 billion loss in its card services business after taking a goodwill charge of $10.4 billion to prepare for Dodd-Frank and a 2009 law aimed at cracking down on predatory credit cards. The Charlotte, North Carolina-based bank estimated the new laws could slash as much as 80 percent of debit-card revenue.

Card issuers such as Bank of America and retailers including Wal-Mart Stores Inc. and Target Corp. are waiting for the Fed to write new rules authorized under Dodd-Frank that would cut the so-called interchange fees that issuers charge businesses for each transaction. Rate cuts of about 50 percent are possible, which would hurt issuers but help retailers, who lobbied for the change.

The Republican takeover may allay issuers’ fears that Congress will continue to pass financial regulatory legislation, said Alison Williams, a Bloomberg Research analyst.

“The worry is that the Fed is going to be regulating debit interchange rates, and next the government will come after credit-card interchange rates,” she said in an interview. “If Republicans win a majority, it’s a lot less likely to happen.”

Technical Fix

Both Democrats and Republicans have signaled willingness to modify the derivatives section of the Dodd-Frank law, which expands oversight of a market faulted for fueling the 2008 financial crisis. Frank, who helped craft the legislation, said a “technical fix” is needed on language that would determine which firms would be required to post margin or capital for transactions that don’t move through a clearinghouse.

Republicans including Representative Ed Royce of California say this is also a priority for them.

“Thousands of American businesses, from airlines to farmers, will find it more expensive to legitimately hedge market risk,” said Royce, a member of the Financial Services Committee. “The committee must ensure businesses that had nothing to do with the crisis are not unnecessarily punished.”

Derivatives changes could benefit Wall Street banks such as Goldman Sachs and JPMorgan, which lobbied against the rules when they were being considered. Those companies have been regular visitors to the CFTC and Securities and Exchange Commission as the agencies attempt to craft the final rules, according to meeting disclosures posted on the agencies’ websites.

Derivatives Value

U.S. commercial banks held derivatives with a notional value of $223.4 trillion in the second quarter, according to the Office of the Comptroller of the Currency. Those banks reported trading revenue of $6.6 billion in the quarter, a gain of 28 percent from the same period a year earlier.

Derivatives are financial instruments based on the value of another security or benchmark. Congress took aim at the industry after soured trades on mortgage derivatives tipped the U.S. economy into the deepest recession since the 1930s.

Technical amendments or broader changes to derivatives legislation will hinge on the level of partisanship in the new Congress, and partisan tensions may make for rough going, at least initially, analysts say.

“It is natural for new majorities to over-interpret their mandate,” said William A. Gallston, a former policy adviser to President Bill Clinton who is now an analyst on congressional politics. “I just hope we end up toward the end of 2011 with a recognition that the choice is reduced to gridlock or cooperation.”

After the biggest overhaul of financial regulations in more than seven decades, a legislative stalemate may be just fine with investors and financial companies, Williams said. “In general, investors just want gridlock so the government will be less of a threat,” she said.